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Pensions Source: NEWS RELEASE 02.23.06 Harrisburg, PA - Corporations across Pennsylvania are being forced to abandon their traditional "defined-benefit" pension plans in favor of "defined-contribution" retirement plans. Such changes have been necessary in order for large companies to avert financial crises and ensure that current and future retiree costs are both predictable and affordable. State policymakers in Pennsylvania, however, have failed to reform the taxpayer-funded defined-benefit pension plans for themselves, judges, school employees, and other state employees. In fact, recent benefit improvements generated $10 billion in additional unfunded liabilities. This coupled with asset performance below the assumed 8.5% annual rate of return is expected to result in dramatic increases in required taxpayer contributions in the future. According to a new report released today from the Harrisburg-based Commonwealth Foundation, Beneath the Surface: Pennsylvania's Looming Pension & Healthcare Benefits Crisis, taxpayers will be funding a 672% increase in pension contributions from $584 million in Fiscal Year 2004-05 to more than $4.5 billion in Fiscal Year 2012-13 for the State Employees Retirement System (SERS) and Public School Employees Retirement System (PSERS). "In a world where private-sector benefit cutbacks and cost reductions occur on a daily basis, state government in Harrisburg has not responded in similar fashion," says Rick Dreyfuss, author of the Commonwealth Foundation report and the former Director, Compensation and Benefits at The Hershey Company. "In fact, instead of reducing the potential for financial disaster, actions in recent years have served to accelerate the coming crisis in Pennsylvania." "Without significant changes in the design of both pension and retiree healthcare benefits plans, the taxpayers of Pennsylvania will likely be facing unaffordable costs," says Dreyfuss. According to published reports and actuarial valuations of assets and liabilities, Pennsylvania taxpayers' costs to fund SERS and PSERS, assuming an annual investment return of 8.5%, will increase from $693 million in Fiscal Year 2005-06 to an estimated cost of $4.742 billion in Fiscal Year 2015-16 and $5.583 billion in Fiscal Year 2020-21. Dreyfuss notes that these dramatic increases in taxpayer costs to fund pensions for lawmakers, judges, school employees and other state workers are a direct result of legislation passed in 2001 and 2002 which generated $10 billion in additional unfunded liability. Legislation passed in 2003 served to refinance many of these additional costs over a 30-year period. "Recent legislation which improved pension benefits, coupled with unfavorable asset performance in the same years, have weakened the financial positions of SERS and PSERS," says Dreyfuss. Prior to 2004, these plans exhibited a surplus (based on valuation assets over accrued liabilities). "The financial positions can only be improved through a reduction in benefits, increases in taxpayer contributions, or superior asset returns over the long-term. There are no easy solutions to the unaffordable situation that legislation has created." In the Commonwealth Foundation report, Dreyfuss also surveyed a representative group of major private employers in Pennsylvania for comparison with the PSERS and SERS pension plans. He discovered that not only are the pension plans for legislators, members of the judiciary, public school employees and other state employees among the most generous among taxpayer-funded plans in other states, but they are far more generous than what can be found in the private sector. For example, certain members of the judiciary participate in a higher benefit category within SERS providing them with 4% of final average pay for the first 10 years and 3% for years thereafter. This formula yields an annual benefit of 100% of pay after 30 years, provided they are age 60. "I cannot find a comparably generous pension plan in the private sector," said Dreyfuss. In addition to the looming pension crisis, government accounting changes that take effect in 2007 will require Pennsylvania state government to annually recognize future retiree healthcare costs. State retiree healthcare benefit programs are also very generous and surpass that found in any Pennsylvania company studied for the Commonwealth Foundation analysis. Eventually, smaller government entities such as cities, municipalities and school districts will be forced to adopt this change in accounting practice. Similar requirements in the private sector dating to 1993 have forced many companies to amend, restrict and even eliminate their benefits programs through cost-sharing, eligibility changes and other coverage reductions. Dreyfuss outlines many recommendations in the report for restoring fiscal solvency to Pennsylvania's taxpayer-funded pension and retiree healthcare plans. "First and foremost, policymakers need to obtain private-sector input and improve the oversight of these programs," he says. "These benefits plans are operating in a vacuum, and without regard to either the taxpayer or global economic realities, which puts taxpayers in financial jeopardy," says Dreyfuss. "State government, like every employer in the private sector, must adopt more predictable and affordable retirement strategies. Failure to do so will harm both PSERS and SERS retirees and the citizens of our commonwealth." EDITOR'S NOTE: The full 40-page Policy Report and the 4-page Executive Summary of Beneath the Surface: Pennsylvania's Looming Pension & Healthcare Benefits Crisis is available online or by calling 717.671.1901. The Commonwealth Foundation is an independent, non-profit public policy research and educational institute that develops and advances public policies based on the nation's founding principles of limited constitutional government, economic and individual freedom, and personal responsibility for one's actions. CONTACT: Matthew J. Brouillette at 717.671.1901 Commonwealth Foundation | 225 State Street, Ste. 302 | Harrisburg | PA | 17101